Cool Things - Failed Bank Notes

"[Paper money] is a deception and a cheat. . . . It is a scheme invented by the few, by which to transfer the hard earnings of the many into their own coffers."
—Samuel Medary, House Journal, 1860

Kansas was truly the Wild West in the years leading up to the Civil War. Arguments over slavery made it a perilous place to live. Drought caused food shortages. Goods were scarce and expensive. And on top of everything else, there was almost no money.

These bank notes speak to the wide-open nature of Kansas' economy during its early years, just after it opened for settlement in 1854. The federal government created Kansas Territory to bring law and order to the region before it became a state. No federal laws regulated banking in the 1850s, so control was up to the states. In Kansas, though, the slavery conflict made it impossible to pass a state constitution. Without a constitution, there could be little regulation. It was a scoundrel's dream.

Opportunists took advantage of the territory's untamed nature, and almost everybody suffered for it. "You probably never imagined a social and pecuniary condition so miserably depressed and wretched as that of Kansas at the present time," lawyer and politician John J. Ingalls wrote to his father in 1861. Sound money was almost impossible to come by. Unlike today, there was no national currency regulated by the U.S. Treasury. Most rural areas engaged in barter and trade instead. When money was available, it came in a wide variety of non-standardized forms: foreign coins, gold dust, privately minted coins, scrip, even land warrants. But by far the riskiest type of currency in the West was a paper note.

Desperate for Money

Anyone could issue paper currency in this unregulated era, but the notes were only good if people were willing to accept them. Unfortunately, Westerners were desperate for money in any form. There are numerous examples of bad fiduciary risks in Kansas Territory. One was the City Bank of Leavenworth—established in winter 1856, opened for business in spring 1857, and closed that summer. This privately owned bank issued large amounts of unsecured paper notes before it crashed. Prompted by such quick failures and their resulting losses, the territorial legislature decided to regulate securities (property of actual value, such as gold or silver, to back up paper notes). Its act of February 11, 1858, required authorized banks to deposit with a comptroller $25,000 in U.S. or state bonds, and prove they had on hand $2,500 in specie (coins), before being allowed to issue up to $25,000 in paper currency. Too often, Western banks had either no securities, or unsound ones. Forcing banks to back up a percentage of their notes with hard money ensured that at least some of the paper was redeemable. As John Ingalls wrote in 1860, "I don't know much about banks, but suppose I can tell by looking around the vaults about how the machine works."

Wildcat Banks

The Merchants Bank bill is an example of a "wildcat" note that plagued western states until federal regulation finally kicked in. Wildcat banks were situated in remote areas, making it almost impossible for their notes to be redeemed. The banks' inaccessibility was important because these notes were not guaranteed nor were they backed by adequate securities.

This bill was issued by Lucien Ayer, a New Hampshire man who traveled to Leavenworth, Kansas, in late 1854 to declare that he and partners were opening a bank. The Leavenworth newspaper stated cautiously, "We know nothing of the solvency of the gentlemen, or upon what basis the notes will be issued." Ayer quickly returned to the East and distributed his notes. A few months later, Leavenworth's press gleefully reported that Ayer had "met with his just dues" and was in jail (although on an unrelated charge of arson). His Leavenworth bank had never been established, but that hadn't stopped Ayer from "getting rid of" his bills in New York and Boston, undoubtedly at great profit to himself. The people who accepted Ayer's notes as tender never saw a dime for the goods and services they had provided.

It wasn't until the Civil War (1861-1865) that the U.S. government began the process of establishing a national currency. The war required huge amounts of cold, hard cash (and credit). Because the nation's gold supply wasn't up to the task, the government issued paper currency not fully backed by precious metals. Gradually, both the states and the federal authorities began instituting banking regulations to prevent the exploitation that had occurred previously. Kansas passed an act establishing a banking commissioner and general banking rules in 1891. The Wild West of banking officially came to an end with the establishment of the U.S.'s central banking system, the Federal Reserve, in 1913.

These notes from failed banks, along with many other examples of territorial currency (most of it bad), are in the collections of the Kansas Museum of History.

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Entry: Cool Things - Failed Bank Notes

Author: Kansas Historical Society

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Date Created: December 2008

Date Modified: December 2014

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